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  • How to Calculate Taxable Income from Salary

    Every year people submit their Income Declarations form and submit the documents that are required. But, not so many know how income tax is calculated. A person’s income that exceeds the maximum amount, is charged income tax at the rate set by the Income Tax department. It is also based on the residential status of the taxpayer.

    The Income Tax Department brings in revenue to the Government. Indian income is always taxable in India. Foreign income is not taxable for a non-resident but is taxable for the resident.

    Income tax is the tax you pay on your income. Income Tax is levied on a person who was in India for 182 days during the previous tax year or the person who was in India for at least 60 days during the previous tax year and for at least 365 days during the preceding 4 years will be taxed.

    A person’s total income is divided into 5 heads of income. They are:

    • Income from salaries
    • Income from house property
    • Profit and gains of business or profession
    • Capital gains
    • Income from other sources

    Salary includes wages, pension, gratuity, fees, commission, perquisites, provident fund contribution, leave encashment, Central Government’s contribution to pension and compensation received for a service.

    What is Salary Income?

    Salary is the remuneration paid by the employer to the employee for the services rendered for a certain period of time. It is paid in fixed intervals i.e. monthly one-twelfth of the annual salary. Salary includes:

    • Basic Salary or the fixed component of salary as per the terms of employment.
    • Fees, Commission and Bonus that the employee gets from the employer
    • Allowances that the employer pays the employee to meet his personal expenses. Allowances are taxed either fully, partially or are exempt.
      • Fully taxable allowances are:
        • Dearness allowance paid to the employees to meet expenses due to inflation.
        • City Compensatory allowance paid to those who move to big metros like Mumbai, Delhi, Chennai, where the standard of living is higher.
        • Overtime allowance paid to the employee who works over the prescribed hours.
        • Deputation allowance and servant allowance.
      • Partly taxable allowances are:
        • House Rent Allowance: If the employee stays in his own house then the allowance is fully taxable. The allowance exemption is the least of
          • The actual house rent allowance
          • If he pays additional rent above 10% of his salary
          • If the rent is equal to 50% of his salary (metros) or 40% (other areas).
        • Entertainment allowance (except for Central and State Government employees).
        • Special allowances like uniform, travel, research allowance etc.
        • Special allowance to meet personal expenses like children’s education allowance, children hostel allowance etc.
      • Fully exempt allowances are:
        • Foreign allowance given to employees posted abroad.
        • Allowances of High Court and Supreme Court Judges.
        • United Nations Organisation employees’ allowances.
    • Perquisites are payments received by employees over their salaries. They are not reimbursement of expenses. Some perquisites are taxable for all employees, they are:
      • Rent free accommodation
      • Concession in accommodation rent
      • Interest free loans
      • Movable assets
      • Club fee payments
      • Educational expenses
      • Insurance premium paid on behalf of employees

      Some are taxable only to specific employees like directors or those who have substantial interest in the organisation, they are taxed for:

      • Free gas, electricity etc. for domestic purpose
      • Concessional educational expenses
      • Concessional transport facility
      • Payment made to gardener, sweeper and attendant.

      Some perquisites are exempt from tax. The fringe benefits that are exempt from tax are:

      • Medical benefits
      • Leave travel concession
      • Health Insurance Premium
      • Car, laptop etc. for personal use.
      • Staff Welfare Scheme
    • Retirement benefits are given to employees during their period of service or during retirement.
      • Pension is given either on a monthly basis or in a lump sum. The tax is treated depending on the category of the employee.
      • Gratuity is given as appreciation of past performance which is received at the time of retirement and is exempt to a certain limit.
      • Leave salaries tax depends on the category of the employee. The employee may make use of the leave or encash it.
      • Provident fund is contributed by both employee and employer on a monthly basis. At the retirement, employee gets the amount along with interest. Tax treatment is based on the type of provident fund maintained by the employer.
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    Deductions on Income from Salary:

    The following deductions are available on the income from salary:

    • Entertainment tax is allowed as deductions for the State and Central Government employees. The amount is the least of either Rs.5,000, entertainment allowance received by the employee or 20% of the basic salary.
    • Professional tax is the tax on employment which is deducted from the income every month. It is imposed at the state level for every salaried individual.

    Please note that the standard deduction is not available for salary income from Assessment Year 2006-2007.

    Computation of the Net Salary of an Employee:

    Here is how the Net salary of an employee is computed:

    Particulars Amount (In Rs.)
    Add:  
    1.Basic Salary  
    2.Fees, Commission and Bonus  
    3.Allowances  
    4.Perquisites  
    5.Retirement Benefits  
      -------------------
    Gross Salary -------------------
     
    Less: Deductions from Salary  
    1.Entertainment Allowance  
    2.Professional Tax  
      -------------------
    Net Salary -------------------

    For computing Total income from various sources, the incomes are classified into:

    1. Salaries
    2. Income or loss from property
    3. Profit and gain from business
    4. Income from capital gains
    5. Income from other sources

    This gives you an aggregate income. All the eligible deductions, allowance and reliefs are calculated on each heads.

    Gross Total Income= A+B+C+D+E

    Total Taxable Income= Gross Total Income- Deductions allowed from income

    Total Tax Payable= Tax on Total Income- Rebates and relief allowed under Income Tax Act

    The tax rate is based on the salary slab that the person falls under. The entire taxable income is then divided into the following 4 parts. These are the rates at which tax will be calculated for the year 2015- 2016:

    1. For an individual who is less than 60 years of age; total taxable income:
      • Up to Rs.2.5 Lakhs: No Tax is charged.
      • Rs.2.5- Rs.5 Lakhs: 10% of the amount exceeding Rs.2.5 Lakhs is charged.
      • Rs.5 – Rs.10 Lakhs: Rs.25,000 + 20% of the amount exceeding Rs.5 Lakhs is charged.
      • Above Rs.10 Lakhs: Rs.1,25,000 + 30% of the amount exceeding Rs.10 Lakhs is charged.
    2. For an individual above 60 years but less than 80 years; total taxable income:
      • Up to Rs.3 Lakhs: Tax is not levied.
      • Rs.3 – Rs.5 Lakhs: 10% of the amount exceeding Rs.3 Lakhs is charged.
      • Rs.5 – Rs.10 Lakhs: Rs.20,000 + 20% of the amount exceeding Rs.5 Lakhs is charged.
      • Above Rs.10 Lakhs: Rs.1,20,000 + 30% of the amount exceeding Rs.10 Lakhs is charged.
    3. For individual above 80 years of age; the taxable income:
      • No tax is charged for taxable income up to Rs.5 Lakhs.
      • Rs.5 – Rs.10 Lakhs: 20% of the amount exceeding Rs.5 Lakhs is charged.
      • Above Rs.10 Lakhs: Rs.1,00,000 + 30% of the amount exceeding Rs.10 Lakhs is charged.

    In addition to these tax rates, you are also charged a surcharge. Also, a 2% education cess is charged on the total tax and surcharge amount.

    News about Taxable Income

    • Finance Minister Singles out Prominent People for concealing Taxable Income

      Finance Minister Arun Jaitley recently stated that certain people of prominence are being investigated for masquerading their taxable income in the form of agricultural earnings, as earnings under this bracket are completely exempt from tax. However, despite opposition members requesting the names of the people being probed to be released, the finance minister declined to share any details. He also stated that anyone misusing the provisions of the Income Tax Act will be brought under the scanner of the Income Tax Department and urged the people involved to not claim political victimization if found guilty.

      17th March 2016

    • MNCs get Notice to Pay Taxes on Expats’ Salaries

      New Delhi: In a move which may make it costlier for multinational companies to employ expats in India, service tax authorities have sent notices to the Indian arm of various MNCs asking them to pay taxes on the salaries of expats deposited in overseas bank accounts.

      Sources said show cause notices have been issued to various firms across sectors. If put into effect, the liability may run into hundreds of crores, according to experts who worry this might have an adverse impact on the overall business climate in the country at a time when the government is trying to attract global businesses into India.

      A posting in India is generally considered an "expat terms" assignment. The indian arm of various MNCs remit a part of expats’ salaries to the parent company for transferring to the bank accounts in their home country.

      Tax authorities argue that the said practice- transferring salaries of expats to foreign accounts by the parent company, which is subsequently reimbursed by the Indian entity- should incur service tax since it entails supply of manpower. Service tax should be paid on 75% of the salary transferred to the parent company in the "manpower supply service," authorities said. Under a 'reverse charge mechanism,’ the Indian arm is liable to pay since there is an import of service involved, sources said.

      It may be recalled here that tax authorities in some jurisdictions dropped the tax demand in the past after some judicial pronouncements on the issue favoured companies. However, the fresh notices have taken the industry by surprise. Service tax officials have, however, played down the issue, stating that the notices could be recurrent.

      India's tax regime has faced flak in recent years, with investors complaining about arbitrary rules. British telecom giant Vodafone is a case in point (the government of the day introduced a retrospective amendment to tax laws to force the company to stump up tax). More recently, minimum alternate tax (MAT) on foreign portfolio investors also raised a hue and cry.

      Promising a stable regime, the Narendra Modi-led NDA government assured it would not open fresh cases under the retro law and accepted the panel headed by AP Shah to resolve the MAT issue in favour of investors.

      India has thousands of expat working across sectors. According to a recent survey, 23% of expats working in India hail from the United Kingdom followed by United States at 14% and Japan and Canada at 7% each.

      Most MNCs in India follow a practice wherein 25% of the salary of expats goes into Indian bank accounts, while the remaining is deposited in foreign bank accounts of the employees. The Indian subsidiary of the MNC urges its foreign parent to directly remit the amount in the overseas bank accounts of the expats.

      According to experts, government should clarify about what 'effective employment' of expats in the Indian entity means. Companies should also have clear documentation to establish the nature of the employee-employer relationship, experts opined.

      15th September 2015

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